SEC Playing Around With its Mandate to Protect the Investing Public
Whistle-Blower Rewards Under Dodd-Frank Under Attack

Business Fraud on the Rise

 It's Déjà vu All Over Again!

On May 23 The Network, Inc., a leading provider of governance, risk and compliance  solutions, and BDO Consulting, a division of BDO USA, LLP, announced the first quarter 2011 findings of its Quarterly Corporate Fraud Index, a comprehensive examination of fraud incident report activity from almost 15 million employees worldwide.

For the first quarter of 2011, the Fraud Reporting Percentage (FRP), a statistic measuring fraud reporting in comparison to all compliance reporting activity from more than 1,000 organizations worldwide, was reported at 20.3 percent. The FRP statistic rose by more than 60 basis points since last quarter. FRP has increased in each of the last three quarters and stands at its highest mark since the second quarter of 2009.

Other first quarter 2011 findings include the following:

  • FRP (Fraud-Related Reports versus all reporting activity) increased one-tenth of a percent – from 20.2 percent to 20.3 percent – compared to the same quarter in 2010
  • Fraud-Related Incidents (FRI), the total number of reported fraud-related incidents, increased four-tenths of a percent compared to the same quarter in 2010
  • In comparison to the fourth quarter 2010, FRI increased 3.3 percent during the first quarter of 2011
  • First quarter fraud incident volume has steadily risen – by 1,000 basis points, or almost doubling – since the 2005 inception of the Quarterly Corporate Fraud Index

According to Luis Ramos, chief executive officer of The Network, the 2011 Q1 fraud index is at a near-record high. Ramos said: “This quarter’s FRP is only 10 basis points lower than it was in 2009, one of the worst years for business on record. The increase is in line with what we are hearing from financial analysts and reinforces the trend that even in a recovering economy, fraud reporting is still on the rise.”

Haven't we been down this road before with corporate America? In the 1980s it was frauds at companies such as ZZZZ Best, Miniscribe, ESM Government Securities, et al. In the 1990s it was Sunbeam, Lucent Technologies, and Waste Management to name a few. Then there were the glorious early 2000s that spawned the Sarbanes-Oxley Act. Who can forget Enron (Jeff Skilling), WorldCom (Bernie Ebbers), Tyco (Dennis Kozlowski), and the rest of the corporate crooks that caused a massive stock market sell-off? I guess Wall Street couldn't hold out for the historical ten years to pass before massive business fraud occurred again. I'm referring to the likes of Bernie Madoff and Countrywide's Angelo Mozilo, both of whom got their greedy hands on investor money and by their actions contributed to the financial meltdown of 2008, along with so many other banks and financial institutions.

I'd like to say that corporate America has learned its lesson and reformed its ways. I'd like to but I can't. As an accounting professor and expert in business ethics I am particularly dismayed by the results of the Quarterly Fraud Index that shows of the 30,000 ethics-and-compliance-related reports from people at those in the surveyed organizations in the first quarter, more than 6,100 concerned accounting or auditing irregularities, embezzlement, kickbacks, and other forms of fraud.

The bottom line as we say in accounting is that fraud in corporate America is just a reflection of the morally-bankrupt society that we have become. It has become endemic in our culture. If you don't agree or have had your head in the sand for the past few years, witness the growing number of politicians who have resigned or been forced out for improper behavior, the increasing number of men who are caught and/or admit to cheating on their wives, a matter I blogged about on May 21, or cyber-bullying and frequent reports of beatings by high-schoolers and younger kids including girl-on-girl attacks and gay-bashing in schools.

 Blog by Steven Mintz, aka Ethics Sage, May 26, 2011